Citigroup said it took a related pre-tax charge of about $3.8 billion in the second quarter. Taking the charge into account, the bank reported a 96 percent drop in earnings.

Citigroup's shares were up 3.9 percent at $48.82 in premarket trading on Monday. The stock gained 1.4 percent after the settlement was announced an hour before the results. (Click here for the latest quote.)

"Despite the fact that Citigroup learned of serious and widespread defects among the increasingly risky loans they were securitizing, the bank and its employees concealed these defects," Holder added.

Citigroup is the second major bank to settle with authorities since President Barack Obama ordered the formation of a task force to investigate the sale and packaging of toxic home loans that were at the center of the 2008 financial crisis.

JPMorgan Chase, the largest U.S. bank, last year agreed to pay $13 billion to settle government probes over the packaging of toxic mortgages.

Bank of America has also been negotiating with the Justice Department over similar claims.

Citigroup said it would pay $4.5 billion in cash and provide $2.5 billion in consumer relief.